Hustle as Strategy

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Strategy, its high-church theologians insist, is about outflanking competitors with big plays that yield long-term “rents” from a sustainable advantage. It is questionable whether this proposition is itself sustainable. Strategy involves a lot more and also a lot less.

The competitive scriptures almost systematically ignore the importance of hustle and energy. While they preach strategic planning, competitive strategy, and competitive advantage, they overlook the record of a surprisingly large number of very successful companies that vigorously practice a different religion. These companies don’t have long-term strategic plans with an obsessive preoccupation on rivalry. They concentrate on operating details and doing things well. Hustle is their style and their strategy. They move fast, and they get it right.

Are executives in these companies living in the managerial dark ages? Wouldn’t they do even better if they linked their hustle to big, powerful strategic plans? I believe the answer is “no.”

Opportunities to gain lasting advantage through blockbuster strategic moves are rare in any business. What mostly counts are vigor and nimbleness. These traits are always needed and always important, yet strategic planning theologians largely ignore them. Countless companies in all industries, young or old, mature or booming, are finally learning the limits of strategy and concentrating on tactics and execution. In a world where there are no secrets, where innovations are quickly imitated or become obsolete, the theory of competitive advantage may have had its day. Realistically, ask yourself, If all your competitors gave their strategic plans to each other, would it really make a difference?

The Big Play

The traditional model of competitive strategy calls for companies to seek sustainable advantage over their rivals by erecting massive barriers to competitors. There are many different types of barriers: strong distribution systems and brand names, proprietary technology or patents, highly efficient and well-located plants, extensive service facilities, powerful trade relationships, broad communication systems. When Coca-Cola launched New Coke in response to Pepsi’s challenge, when Kodak tried to circumvent Polaroid’s patents, or when Apple assaulted IBM’s dominance in the office market, each was trying to get at the competition with a big play. Putting so much confidence in the big-play theory did not prove as rewarding as all three had hoped.

Nowhere are the limits of the big play better demonstrated than in financial service industries. Certainly, some of these companies talk about establishing sustainable competitive advantage, but somehow their words do not lead to the elaborate strategies that manufacturing companies, for example, may pursue. Plans consist of targets—of revenues, costs, profits, and number of employees—and terse descriptions of their competitors’ capabilities (“strong,” “average,” “weak”). Occasionally, they are garnished with vague comments about their own competitive advantages like “an abundance of capital” or “our people are our most important asset.” Some leaders in financial services have not subscribed to the competitive religion because they are secure in their profits and understand the reality of their business. “Major sustainable competitive advantages,” as Warren Buffett puts it, “are almost non-existent in the field of financial services.”1 The Reserve Fund of New York invented money market mutual funds in 1972; it now has more than 300 competitors and a market share of only 0.8%.

The rewards for new product development are often temporary because such products are readily and cheaply imitated. Their descriptions are circulated via prospectuses, which competitors can easily get. If the prospectus doesn’t tell all, defecting employees will. Perhaps conditioned by the markets they deal in, investment bank professionals switch jobs readily for the marginal $100,000.

Innovative financial service firms, therefore, do not focus on creating a blockbuster product as, for example, IBM does in mainframes; they concentrate on forging a chain of new products, each link being (they hope) an improvement on the previous one, which often a competitor has introduced. Product innovation seldom flags: even in the declining syndicated loans business, Euromoney reported in 1984, “Innovation was the key word… Every new deal brought with it a new wrinkle. The most innovative bank usually walked away with the mandate.”2

Competitive moves rarely yield lasting advantages because financial businesses run on very fungible resources. Unlike automobile companies, for example, which needed several years to retool their plants to respond to the Japanese small-car threat, commercial and investment banks aren’t hobbled by large specialized assets.

On its 1984 balance sheet, Citibank, the world’s largest bank, had only $1.6 billion invested in premises and equipment (about twice its net income) compared with General Motors’ $39 billion (more than nine times its 1984 income). A big bank’s most important pieces of capital equipment are word processors, facsimile machines, and satellite transponders. They have multiple uses—they can be quickly adapted for new business initiatives, quickly used to copy what competitors are doing.

A financial institution’s employees are a potentially versatile resource. Corporate finance professionals can do practically anything for fee-paying customers: issue stock or buy it back, find acquisitions or divest subsidiaries—in a pinch, even put together a Chapter 11 package. Operations people who process “tickets” for pork bellies today can handle Treasury-bill transactions tomorrow. When one corporate bank successfully establishes a “relationship team” or a “treasury marketing unit,” it doesn’t take long for competitors to reshuffle their staffs to form similar groups.

These organizations usually employ few people for the volume of business they do. In 1984, Citicorp had only about 60,000 employees worldwide, Merrill Lynch, the largest employer among U.S. investment banks, about 12,000. Salomon Brothers, the biggest capital-raising firm in the world, fits most of its employees into nine floors of a Wall Street building. Of course, people problems do have to be solved when a financial institution wants to make a quick move, but these are more manageable than the problems industrial companies have to solve when trying to manage fixed and mostly immovable assets. Moreover, their flexibility is facilitated by the absence of restrictive unions.

For a while, it seemed that computer automation might make competitive strategy more important, but this appears unlikely. (See the insert entitled “The False Promise.”) Important strategic campaigns may also be undermined by shifts in demand. A crying institutional need for tax-exempt bonds disappears when buyers have no income to shelter. Responding to changes in interest rates, individual savers can drain the assets of money market funds (by 21% in 1982), only to turn around and pour money into them again (up by 27% in 1983).

The False Promise

Some observers have suggested that the rapid spread of computer automation will make competitive strategy more important, as those institutions with greater computer capability dominate their rivals. In this line of thinking, automatic teller machines (ATMs) will replace human tellers; electronic funds transfer (EFT) will take care of most of the payments now laboriously made and processed by check; and expert systems will do what intelligent human labor now does. Technology, if you will, may become a competitive barrier.

Yet technology may not be the potent precursor for competitive strategy its advocates assert—especially if financial institutions establish common networks and share facilities. As of August 1984, 45% of the ATMs in the U.S. were tied to one of the nation’s 175 regional networks. Such shared networks obviously undermine some institutions’ efforts to establish protective barriers through proprietary facilities.

Moreover, computing, data processing, and communications capabilities are increasingly available to everyone. Constantly declining memory, microprocessor, and mass-storage prices allow even small institutions to install state-of-the-art hardware without incurring cost disadvantages; the proliferation of software houses allows them to purchase quality systems and applications software. They can easily lease cost-effective communications circuits from a variety of data networks.

A Touche Ross survey found: “Senior executives…believed technology had little strategic impact in banking, despite massive investment by the industry… [They] are disappointed [by the] inability to use technology to achieve lasting competitive advantages vis-à-vis their principal competitors.”* While hardware and software might account for a high proportion of the value added by financial institutions in the future, the performance of employees will remain the critical differentiator.

Besides, the growing sophistication of customers increases the importance of execution and opportunism over computerization. No matter what the computer network, retail and institutional customers scrutinize prices and fees more closely, shop around more, and are less willing to be tied (by electronics links or otherwise) to one institution. A striking example is found in securities underwriting. Many corporate treasurers no longer need investment banks to design new issues for them. And because the SEC now allows shelf registration of securities, issuers can, when market conditions appear favorable, invite competitive bids from investment banks to buy their stocks or bonds. So-called bought deals have turned underwriting into a high-stakes poker game requiring acute speculative judgment—submitting a “winning bid” at too low a price can cost millions of dollars.

Regulatory changes often make and unmake product markets. President Johnson’s 1968 requirement that U.S. companies raise capital for overseas operations from foreign markets quadrupled the size of new Eurodollar issues in a single year. A steep decline in corporate demand for foreign exchange resulted from changes in accounting rules for currency exposure. The fickleness of boardroom fashions is also unsettling—one year companies want investment bankers to consummate acquisitions, the next year to arrange leveraged buyouts.

Naturally, there are exceptions. There are a few financial institutions that through bold and imaginative strategic moves have erected formidable barriers against their competitors. (See the insert entitled “Exceptions to the Rule.”) Usually, though, competitive moves rarely yield sustainable advantages. No rents reliably flow to financial firms—like Eastern, they have to earn their wings every day.

Exceptions to the Rule

There are some firms that have won big with bold, astute, long-term plays. The most visible example is American Express, which spent millions of advertising and promotion dollars enrolling card members and persuading businesses to honor its cards. Amex now has 15 million U.S. cardholders while its nearest competitor, Citibank’s Diners Club, has only 2 million.

Merrill Lynch’s innovative Cash Management Account (CMA) has maintained its early dominance because of the unusual investment that went into its development. The brokerage house paid for more than a hundred programming man-years to develop the systems for the CMA and even secured a patent for the process. Although numerous clones eventually emerged, the CMA still controlled 75% of the market in 1984—seven years after its introduction.

First Boston formed an alliance with Credit Suisse that was protected by extensive distribution channels. Combining First Boston’s good but not unique underwriting skills with Credit Suisse’s ability to sell bonds to its discretionary accounts, the joint venture (CSFB) has dominated underwriting in the Eurobond market. In 1984, its after-tax return on equity was 32% in a business where many investment banks are lucky if they break even.

Managers should look for long-term competitive moves in businesses that:

Serve individuals rather than institutions or corporations. Individual customers are easier to lock in: they don’t have the time or the resources to establish multiple relationships, are less prone to switch, and may place greater value on a reputable brand name.

Involve a large number of small transactions. Businesses that collect and process checks for retail chains, for example, have more opportunities for surprising competitors and establishing economies of scale barriers than companies that handle a few big ticket transactions like the private placement of securities.

Are in the midst of major regulatory changes. Businesses that face big changes like the Glass-Steagall Act of 1933, the abolition of fixed commissions in stockbroking in 1975, or the deregulation of bank deposit rates in 1980 should consider bold strategic initiatives. The CMA, for example, grew out of a project Merrill Lynch launched in 1975 to protect itself from the discount brokers that Merrill expected would proliferate after fixed commissions had been removed.

Are mature and dominated by few competitors. Firms seeking to build share in such businesses ought to examine whether the leaders are protected by barriers that only a bold strategy can circumvent. For example, a new travel-card competitor is unlikely to gain share from American Express simply through better execution. The new kid on the block must look for rivals’ blind spots or consider moving out. Similarly, institutions suffering from an extended loss of market share and profitability—as savings banks did against money market funds—should also investigate the possibility that they are on the wrong side of a sustainable advantage.

Each of these rules has many exceptions: as money market and mutual funds have been distressed to discover, individuals will incur considerable inconvenience in order to switch from fund to fund, and in practice, American Express is about the only financial institution that has established a significant brand name in the consumer market. Big public policy changes like the floating of the dollar in 1971 or the adoption of money-supply targets by the Federal Reserve in 1979 caused great shifts in demand for a number of products, but few opportunities for financial institutions to establish durable barriers against their rivals. And dramatic turnarounds—for example, the transformation of Citibank’s wholesale banking in the United States from a break-even business to a $300-million earner—have been accomplished without strategic masterstrokes.

The Bottom Line

The conventional strategic wisdom suggests that—without barriers against competitors—companies will earn only uniform and low returns. But the rewards in financial services are often huge. With practically no proprietary products, captive customers, or economies of scale, Goldman Sachs is reputed to have earned $400 million before taxes in 1983—a 60% return on capital. Energetic venturers, like Ivan Boesky, T. Boone Pickens, and Carl Icahn, have earned hundreds of millions of dollars a year, living from one deal to the next. Morgan Guaranty regularly earns twice the ROA of other banks serving similar customers with similar products.

These high profits stem largely from superior execution or forceful opportunism, not structural competitive barriers. Different execution styles lead to considerable variations in bottom-line results. Many wholesale banks have the same cost of funds, offer similar products and services, and use the same kinds of sales forces to reach the same customers. Yet some are more profitable than others. They “get it right.” They make fewer credit mistakes and don’t suffer large write-offs. They get a higher share of corporate cash balances because their account officers get and stay close to their clients. They know their clients so well that they make suggestions before the clients know they need them. They provide accurate and revealing statements. “Lost” wire transfers are found promptly. They’re informed, fast, and available.

Or consider pension funds. Fund managers deal with many institutions that provide advice and executions. Yet they are close to only a few. Why? Because these few are keeping up carefully and constantly with the managers’ portfolios and are giving sound and timely advice. In short, only a few hustle, and they get most of the business. The managers may accept prices slightly off the best available because they value what the hustling institutional salespeople provide. The incentive for the salespeople is that these slightly-off prices, accumulated over billions of dollars of trades, can add up to big profits.

Businesses characterized by ease of entry, fast action, and service intensity are like poker, not chess. While it is important to understand and anticipate your opponent’s reactions, instead of devising a consistent and long-term strategy for the match, you play each hand as it is dealt and quickly vary tactics to suit conditions. The way a firm hustles or takes advantage of transitory opportunities makes a real difference in how consistently it wins.

Of course, there are dangers. In risk arbitrage (take-over plays on the stock market), foreign exchange, bond and commodity speculation, mergers and acquisitions, and venture capital, there are no guarantees of a steady stream of opportunities, no assurance that the next deal won’t wipe out previous gains and—apparently—no long-term competitive strategies. On the contrary, it is important not to be predictable—the position of bond traders, for example, is jeopardized if their rivals read them. Flexibility, agility, and hustle are more important than a fixed plan.

The Manager’s Role

When the key to profitability lies in superior execution and hustle, managers have a different mix of responsibilities than if strategic invulnerability determines all. They don’t need to (and in fact, can’t) analyze their competitors in great depth or formulate detailed strategies against them. Instead, they turn inwards to promote a stream of vigorous action in pursuit of customers and their satisfaction.

Executives of successful financial institutions don’t worry much about what their rivals do. “We don’t need to know what other firms are like,” insists a Goldman Sachs partner. “We have a formula that works. Why pay attention to what others are doing wrong?” While the top organizations do monitor the competition, they don’t plan according to it. “I don’t view competition as an obstacle,” says the head of one of the most successful banks in North America. “Our most significant challenge is internal—making certain we manage our resources so that we are the best in the business.”

Since financial institution senior managers can’t easily stay on top of the competitive interplay, they can and should claim only limited influence over decisions that in many other industries the company presidents approve. Otherwise, financial institutions become bureaucratic and unresponsive.

With regard to product development, account officers or corporate financiers are better positioned to know what customers need and competitors offer. They must create and modify products without senior management’s judgment as to whether they are consistent with long-term competitive strategy. In industrial businesses, general managers often decide which customers to target; their sales forces simply execute decisions. Success in financial institutions can hinge on responsiveness to subtle but important differences between customers, so managers may establish only broad customer-selection guidelines.

In the same way, prudent managers of industrial companies may insist that new-business proposals promise competitive advantage, while managers of financial institutions must live with much lower levels of proof and think more about the quality of execution. Senior executives let 25-year-old traders risk millions of dollars; industrial counterparts pass much lesser expenditures through several levels of trial by committee.

Sustaining the hustle

Paradoxically, an institution can foster individual hustle only when it adopts a centralized system to measure profitability and determine whether people are focusing on the right businesses, products, and customers. When managers can compare and monitor the money-making success of businesses and customers, they will happily delegate responsibility. Those who can’t, become defensive and bureaucratic.

The failure to measure profits due to businesses, products, and customers leads to a vicious cycle of deteriorating execution. Instead of providing exceptional service to a select group of profitable clients, firms with poor controls offer mediocre service to all. They treat loan approvals for deadbeats and good credits alike and take months instead of weeks; bond buyers and sellers who need fast price quotes are put into intolerable queues. Processing costs and errors escalate as tickets from unprofitable transactions clog operations.

When poor execution leads to lower profits, these same institutions often conduct overhead reduction campaigns that result in indiscriminate, across-the-board cuts in customer service and support—for profitable as well as unprofitable customers. Morale also sinks when it’s difficult to identify the staff people that have achieved superior profits and compensate them. Commercial banks have a particular problem in attracting and keeping higher quality professionals because investment banks have learned how to measure and reward individual performance more accurately.

Measuring profitability is clearly a job for general managers, not accountants. Assigning the right costs to different credit products, for example, requires considerable judgment and political skill because they often draw from the same pool of funds and are distributed through common channels. But it must be done. Lumping too many costs into the elusive category of overhead is an unfortunate cop-out. It’s hard to evaluate the performance of a business unit where 60% of costs is actually overhead allocated on the basis of the number of employees or floor space.

Or take foreign exchange or bond trading where traders offer currency or bonds at slightly higher prices than they pay for them, and where they are also speculating on currency and interest-rate changes. It is extremely difficult to separate these people’s middleman function from their speculative activity because it is impossible to distinguish between transactions to create a speculative position and trades to accommodate customers. How the manager draws these lines has long-term implications for the service that customers receive.

Speculative products present special problems. When a bank sells interest-rate options, it receives cash and puts down a bet. If it pays off, the bank keeps the cash and apparently earns an infinite return (since no money actually was paid out). Measuring the profitability of an options business by traditional methods is clearly inadequate; although the odds favor an option seller, potential losses from a few unexpected changes in rates can be high and must be factored in. Product instability can present further complications. Just as an institution establishes a system to measure the profitability of swaps, for example, the innovators get busy and design a slew of variants to confound the plan.

Good financial institution managers recognize the importance of profit measures, and they are obsessed with establishing them. One manager, responsible for a remarkable turnaround in American banking, attributes much of his success to “a very rigorous and steady management review process, which was one of the hardest things that was put in, and which was done right in the beginning. Every month we sit down with every division and review where we stand against goals. Sometimes we dipstick our performance once a week… We believe you are who you track. Once you build the business to a certain critical mass, I think you have to insist that you have a detailed understanding of all your costs and of the dynamics of your revenue. Otherwise, the whole exercise is irresponsible.”

Controls can also be aimed directly at the quality of execution. American Express, for example, identified 180 measurable criteria for customer service—like the time taken to replace lost cards or to respond to billing inquiries. It then established performance standards for each criterion that forced big changes in operations and dramatic improvements in service. The company now replaces lost cards in as little as 2 days and has reduced its response to customer billing inquiries to 10 days from 16.

Measuring risk

Just as companies measure profitability to promote hustle, so they must monitor risk. In giving financial officers the discretion to put millions of dollars on the line quickly, senior executives must determine risk guidelines and their institution’s overall risk position.

Continental Illinois, for example, went bust because senior managers did not adequately control the quality of its loan portfolio. Moseley Hallgarten, a mid-sized brokerage firm, plunged into the complicated business of trading zero-coupon bonds in 1983 without any way to keep track of the pieces. After traders had lost about 40% of the firm’s capital in the first nine months of 1985, executives discovered the mess.

The reverse also happens. Small financial institutions like savings banks have lost market share in the mortgage business because aggressive new entrants take risks that the banks’ overly centralized and slow credit approval process prohibit.

Successful, hustling organizations systematically manage risk. A “risk points” system that measured bond-price volatility enabled one institution to build one of the largest government-bond trading operations in the United States. It assigned risk-point limits to the individual traders, their managers, and division heads—ceilings on the positions they could take. The institution built a large cadre of traders of different levels of skill and experience and decentralized decision making without losing control.

A bank has developed a credit-scoring formula that allows it to finance equipment for companies too small to have their own account officers. Any officer can go to a company that has a piece of equipment to be financed, apply the formula, and if it’s appropriate, close the deal. The officer never has to show up again unless more equipment must be financed or the company misses a payment.

Recruiting hustlers

While top officers of large industrial companies cannot play a large role in recruiting, financial institution managers must be closely involved because the quality of their firms’ execution depends on the caliber of the employees. It is unusual for a good investment bank to offer a candidate a job without an interview by at least one managing director.

Top commercial banks are willing to incur direct opportunity costs for training employees. Citibank’s account officers get very high ratings in customer surveys, in part because Vice Chairman Thomas Theobald mandated a rigorous training program. Many people in the industry consider Morgan Guaranty’s year-long training program for recruits the equivalent of a top MBA program.

Such training in particular and the institution’s policies in general cannot favor marketing over operations. The “visible” half of execution—the marketing professionals—can perform only as well as the “invisible” operations area allows it to. Moreover, the quality of operations can also determine an institution’s ability to innovate. As the chief administrative officer of Merrill Lynch says, “If everybody’s just going to copy new products to compete in the marketplace without first having the operating systems and back office in place, there’s going to be total disaster.”

Executives can promote quality operations by giving that area an independent identity and sometimes specialized personnel. As one manager explains, “People who run operations have to love operations. They have to be driven types who want to make a process perfect. They must constantly fool with it to make it better and better, then revolutionize it once again.”

Operations must also be given status along with identity. “Class” divisions between lending officers and backroom operators are crippling. Institutions that are serious about the quality of their operations give employees compensation, recognition, and opportunities for advancement comparable to what they offer marketing professionals. Citibank made John Reed its youngest senior vice president, largely due to his role in operations. At Goldman Sachs, the partner in charge of operations is widely regarded as the third most powerful person in the firm, and the firm actually recruits promising business school graduates for that function.

The Value of Vision

The very finest financial organizations have more than a well-designed set of controls, are more than a way station for capable free agents. Their leaders have an institutional vision—a shared understanding of what their firm is about and where it is headed. Goldman Sachs and Morgan Guaranty deify teamwork and putting clients first. Salomon Brothers’ vision, in contrast, focuses on taking trading risks.

A vision is the glue that holds together the firm, with its many diverse and unrelated activities and its processions of recruits and defectors. It provides continuity amidst the turbulence, advantages that transcend the fluctuating fortunes of its individual businesses. For example, if the government-bond market, which now accounts for a sizable chunk of Salomon’s business, unexpectedly became less attractive, the firm’s trading skills would allow Salomon to move into whatever market was in vogue—quickly and effectively.

A vision differs from competitive strategy. In a vision, vagueness is not a vice. It is wide enough to allow individual hustlers the right amount of latitude in finding opportunities. Though Salomon Brothers is deeply committed to taking trading risks (and could, in fact, see its net worth wiped out if the value of the securities it has at risk at any one time drops only 12%), it has come up with some of the most innovative financial products around (like the creation of zero-coupon bonds out of U.S. government issues).

A vision doesn’t require exhaustive analysis. It is sketched, over time, from the deep knowledge of the organization’s internal capabilities, traditions, and values. It cannot be derived from checklists of industry structure and competitive behavior. And a vision is only as good as the energy, resourcefulness, and professionalism that combine to service every customer and every new opportunity every day.

The only way to make the vision real is through superior execution. That’s the key. It’s the resulting hustle that outlasts product cycles and wins against unremitting competition.

1. Warren E. Buffett, Berkshire Hathaway annual report, 1984.

2. “Novelty Is the Best Policy,” Euromoney, December 1984, p. 17.

A version of this article appeared in the September 1986 issue of Harvard Business Review.

Amar Bhide is an associate professor at the Harvard Business School in Boston, Massachusetts, where he teaches entrepreneurship. He has published two other HBR articles on entrepreneurship: “Bootstrap Finance: The Art of Start-ups” (November–December 1992) and “How Entrepreneurs Craft Strategies That Work” (March–April 1994).